Södertälje, Sweden — Last year, Mr. Tobya watched his livelihood turn to ashes. First, insurgents with Molotov cocktails torched his liquor store in central Baghdad. Then, he says, his business partner was kidnapped and fatally shot.

Fearing for his life, Tobya fled to this sleepy town in Sweden's snow-covered hills, where friends and family had found refuge. But the Swedish government has denied his asylum claim and asked him to return to Iraq.

"If they could guarantee that no one would kill me, I would go back tomorrow," says Tobya, a stocky man with cropped, thinning hair who asked that only his last name be used. "But Baghdad – the place is an inferno."

Until recently, Sweden was a kind of Promised Land for Iraqi refugees. Drawn by its liberal asylum rules and generous social benefits, 18,559 Iraqis sought refuge here in 2007 alone – far more than in any other Western country.

Humanitarian groups have held up the nation's policies – part of a long open-door tradition – as a model. They have also warned that if other industrialized nations don't follow Sweden's lead and take in more Iraqis, the mounting refugee crisis in the Middle East could destabilize the region. But with its welfare system under strain, Sweden has begun clamping down on Iraqi asylum seekers in recent months, dampening hopes that the West will step in and help contain the crisis.

Indeed, since January, the nation has granted just 25 percent of Iraqi asylum claims, down from more than 80 percent in 2007. It has also begun forcibly deporting those rejected back to Iraq.

"We had hoped to see other nations rise to Sweden's level," says George Joseph, the director of Caritas Sweden, a Catholic aid group. "Instead Sweden has stooped to meet them."

49,000 Iraqis have fled here

Since 2003, when war broke out, at least 4.7 million Iraqis have been uprooted, creating the largest refugee crisis in the Middle East since Israel was founded. About half of the displaced remain in Iraq, while more than 2 million have spilled into Syria and Jordan, where the influx has overwhelmed hospitals and schools and created water and housing shortages.

Humanitarian groups say that situation among refugees in these countries is increasingly desperate, with many living in ramshackle camps and struggling to meet basic needs, like food and medicine. Unless industrialized nations act soon, Amnesty International has warned that the situation could "implode, further destabilizing the region."

But most Western countries have refused to offer direct aid to Syria and Jordan, or welcome more than a handful of refugees. The US admitted just over 1,600 Iraqis in fiscal year 2007, far short of its initial 7,000 target, which the State Department attributes to administrative bottlenecks.

Sweden, a country of 9 million people, which has played no role in the Iraq war, has taken a more liberal approach. Until recently, refugees fleeing Iraq's violent south and central areas were all but assured asylum and a generous resettlement package, including subsidized housing, job training, and a monthly stipend for living expenses.

As a result, Sweden has seen nearly 49,000 Iraqis pour into the country since 2003, and watched the number of Iraqi asylum claims climb by almost 600 percent. Last year, it received nearly as many Iraqi asylum seekers as all other European nations combined.

Mayor's effort to meet refugee needs

But the sudden influx has strained Sweden's generous welfare system and overwhelmed the handful of communities to which the newcomers have gravitated. Among them is Södertälje, a town of about 80,000 people just south of Stockholm. Since 2003, it has welcomed between 5,000 and 6,000 Iraqis refugees – slightly more than the US.

To handle the influx, the local government has hired more than 70 employees, whose sole job is to help refugees integrate. Still, Mayor Anders Lago says, the town is struggling.

Unable to find jobs, many of the newcomers end up on welfare, which has put a squeeze on the town's budget. Housing is in such short supply that up to 20 refugees may share a single apartment, and classrooms are overflowing. "We simply can't hire teachers or build schools fast enough to give all these young people the good start they deserve," Mr. Lago says.

Sweden has repeatedly pressed other European nations to share the load, with little success. On average, European nations grant just 11 percent of Iraqi asylum claims, according to the European Council on Refugees and Exiles, and some countries – among them Greece – accept fewer than 1 percent (see sidebar). This is partly a side effect of the harder line on immigration that the European Union has taken in wake of the Sept. 11 attacks, according to UNHCR, the United Nations refugee agency.

In the end it was Sweden that retooled its policies. Migration Minister Tobias Billström says the nation had little choice. "Sweden did not start this war," he explains, "and we have done our best to help those who are fleeing. But we are a small country. We're simply not able to help everyone."

The first sign of this shift came last July when the Swedish Migration Board decided that the situation in Iraq had improved enough that blanket protection for those fleeing central and southern parts of the country was no longer needed.

Sweden's migration court upheld the decision in an October ruling, saying the fighting in Iraq did not qualify as an "internal armed conflict" – the European Union's prerequisite for requiring member states to offer shelter to refugees.

This means that in order to gain asylum, applicants must show that they personally are threatened, something advocates for refugees say can be difficult to do. In a landmark case, a refugee was denied protection despite producing a fatwa calling for the death of his relatives because he was not named in the document.

Sweden has also begun forcibly deporting Iraqis, including to violence-prone south and central Iraq. Mr. Billström, the migration minister, says the measure was needed to keep the asylum system from breaking down, but it has prompted an outcry from humanitarian groups. "The consequences of returning refugees back to those areas can be as serious as death," says William Spindler, a UNHCR spokesman.

Some Swedes also fear the policies could erode a rich humanitarian tradition, which dates back to World War II.

Since the rules took effect, the nation has seen the number of Iraqi asylum claims tumble, with just 2,550 filed between January and March – about half the number submitted during same period in 2007. Meanwhile, a growing number of refugees have begun applying for the "reintegration contribution," a payment of $3,364 that the Swedish government gives to Iraqis who voluntarily return home.

A perilous, $20,000 journey

But experts say most Iraqis are more likely to hole up in Sweden or try neighboring countries. (Norway has already seen a spike in Iraqi applicants.)

This is partly because of the ordeal Iraqis go through to get to Scandinavia. With Europe tightening its borders, many hire smugglers, which often means crossing the Aegean Sea on rickety boats, spending days locked in container trucks, or braving Greece's land-mined border with Turkey on foot.

To pay smugglers, who usually charge $10,000 to $20,000, many Iraqis sell everything.

Joulet Barbar, a Södertälje resident who wears her graying hair tucked under a thick, white shawl, says she hawked her house, her furniture, and her heirloom jewelry, and still had to borrow $10,000. Now she sleeps on a mattress in a relative's living room. "At least here I am safe," she says.

Other refugees say violence has scattered their friends and relatives in Iraq, leaving them with few roots back home.

"For these people, there is little or nothing to return to," says Mr. Joseph of Caritas. "And they will find a way – any way – to avoid going back, because the last thing people give up is the hope of a better life."